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ARBTRADING PLAN

Three Day Hammer Trades & Day/Swing Trades

The stock's listed in "Free Email Newsletter" are not just recommendations. These are stocks that I am presently buying and selling. Every week, I will list the Three Day Hammer candidates. These are not longs or shorts until the the stock moves above the buy stop (for longs) or sell stop (for shorts). When you receive this list, you enter an order to buy or sell short based on the recommended limit order. If the order is filled, you place a stop loss as recommended.

Stop Loss - This is critical. Any failure of placing a stop loss can result in catastrophic losses or at worse you can lose any profits that you made from the last several days to months. Place the stop loss the moment that you have been placed into the trade. If you are stopped out, take the loss and move to the next trade. On average, you should have a 40-50% win ratio. You will have more number of losses than wins. However, with careful money management, the dollars won will exceed the dollars lost.

Gap Rule - Do not take any position where the stock gaps up $.25 for longs or down $.25 for shorts. You may consider using a limit order of $.10 above (longs) or $.10 below (shorts).

Trailing Stops - If not stopped out, move the stop order to $.10 under the low of the day for the long Three Day Hammer Trades or $.10 above the high of the day for the short Three Day Hammer Trades.  Other methods are to use the low from 2 days ago or a 10 Day Exponential Moving Average. You an use a hard stop, meaning when the stop is hit, you are out. Or an "After the Close" stop where if the stop is hit during the day, you close the position on the next opening.

Trailing Stop Rule - on long trades, stops can never be lowered and on short trades, stops can never be raised.

Two for One Money Management - when we have a profit equal to the risk factor, meaning that the stock has moved profitably by the number indicated by the risk, sell 50% of the position. You let the rest of the shares run based on the trailing stop.

Number of Shares - Everyone must determine their own risk factor. In general, it is foolish to risk more than 1-2% of a portfolio in any one trade. And smaller might be better, especially if you are new to trading. Determining the number shares is relatively easy. For example: using a portfolio of $50,000, a 1% risk and a listed risk factor of 1.15. You would place at risk $500 (1% of $50,000). Divide the $500 by the risk factor  (1.15) and you arrive at +434 shares. Round this to the lowest hundred for 400 shares. Place your order accordingly. However, this method, while maximizing profits can involve severe drawdowns. Other methods include purchasing an equal number of shares (say 500 shares at a time) or equal dollar amounts of shares (such as $5,000 a trade).

 

 

Copyright 2004 ARB Trading | Risk Notice & Disclaimer
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